RELATED ORGANIZATIONS Section 4.3 DEFINITIONS AND AUTHORITIES also discusses the major provisions of the GLBA as affecting such transactions and the statutory implications Sections 23A and 23B of the Federal Reserve Act (FR for the FDIC examination process. Act), as applied by the Federal banking agencies under various Federal banking statutes, govern transactions between banks and affiliated business organizations. The GRAMM-LEACH-BLILEY ACT (GLBA) Gramm-Leach-Bliley Act (GLBA) amended many laws governing the affiliation of banks and other financial The passage of the GLBA significantly expanded the service providers. Among other laws, the GLBA amended powers of bank subsidiaries of bank holding companies to the Banking Act of 1933, the Bank Holding Company Act engage in “financial activities,” including offering of 1956, (BHC Act), the Interstate Banking and Branching insurance and securities products. The GLBA added Efficiency Act of 1994, the Investment Company Act of Section 46 of the FDI Act that prescribes the circumstances 1940, the Investment Advisers Act of 1940, the Securities in which an insured state bank may engage in financial Exchange Act of 1934, the International Banking Act of activities as principal that may be conducted by a national 1978, the FR Act, the Federal Deposit Insurance Act (FDI bank only through a financial subsidiary. The GLBA also Act), and the Home Owners’ Loan Act. repealed the restrictions on banks affiliating with securities firms which were contained in Section 20 of the Glass- Section 18(j) of the FDI Act extends the provisions of Steagall Act and repealed the prohibition on interlocking Sections 23A and 23B of the FR Act to state nonmember directors between banks and securities firms contained in banks. Section 23A regulates transactions between a bank Section 32. and its "affiliates,” as that term is specifically defined in Section 23A. Section 23B of the FR Act was enacted as part of the Competitive Equality Banking Act of 1987 to Financial Holding Company expand the range of restrictions on transactions with affiliates. Section 10(b)(4) of the FDI Act authorizes The GLBA authorizes the organization of a “financial FDIC examiners in the course of examining insured banks holding company” (FHC) under Section 4 of the BHC Act. “to make such examinations of the affairs of any affiliate of A FHC can engage in any activity, and may acquire shares any depository institution as may be necessary to disclose of any company engaged in any activity, that the Board of fully --- (i) the relationship between such depository Governors of the Federal Reserve System (the FRB) institution and any such affiliate; and (ii) the effect of such determines to be either financial in nature or incidental to relationship on the depository institution.” “Affiliate” is such financial activity, or complementary to a financial defined in Section 3(w)(6) of the FDI Act as having the activity and does not pose a substantial risk to the safety or same meaning as the definition of that term in Section 2(k) soundness of depository institutions or the financial system of the BHC Act. generally. FDIC’s enforcement authority also extends to certain The GLBA identifies some specific activities which are parents and affiliates which are not bank holding determined to meet this test and prescribes a consultative companies. Section 3(u) of the FDI Act defines process involving the shared input of both the FRB and the “institution affiliated parties” to include the controlling Secretary of the Treasury for future definition of activities stockholder of an insured depository institution, or any determined to meet the test. shareholder or person who participates in the conduct of the affairs of an insured depository institution, or any Section 4(k)(4) of the BHC Act identifies a list of specific independent contractor who participates in certain acts activities deemed “financial in nature” for these purposes. which cause significant adverse affect on an insured Qualifying FHCs may engage in such activities without depository institution. This would include the parent regulatory approval provided notice is given to the FRB companies of Industrial Loan Companies and other “non- within 30 days after the activity is commenced. The listed bank” charters. Under Section 8(b) of the FDI Act, the activities include: FDIC can issue Orders against institution affiliated parties. • Lending, exchanging, transferring, investing for This section of the Manual discusses affiliates and others, or safeguarding money or securities, subsidiaries, including the restrictions on transactions • Insuring, guaranteeing or indemnifying against loss or between affiliates and insured banks, exceptions to those illness, or issuing or providing annuities, as principal, restrictions, and the examination authority of the FDIC agent or broker, with respect to affiliates of nonmember insured banks. It DSC Risk Management Manual of Examination Policies 4.3-1 Related Organizations (12-04) Federal Deposit Insurance Corporation RELATED ORGANIZATIONS Section 4.3 • Providing various forms of financial, investment or activities that were identified in the GLBA as being economic advisory services, including advising financial in nature are already permissible for a national investment companies, bank to conduct directly. • Issuing and selling instruments representing interests in pools of assets permissible for a bank to hold The statutory criteria that must be satisfied in order to directly, engage in activities through a financial subsidiary are: • Securities underwriting, dealing and market making, • Engaging in activities that have been determined to • The state nonmember bank and each insured meet the “closely related” and “proper incident” tests depository institution affiliate of the state nonmember under Section 4(c)(8) of the BHC Act, bank must be and continue to be well capitalized after • Engaging in activities in the United States that the deducting the bank’s investment, including retained FRB has previously authorized bank holding earnings, in all financial subsidiaries. companies and their subsidiaries to conduct abroad • The state nonmember bank must disclose the capital under Section 4(c)(13) of the BHC Act, deduction and the separate assets and liabilities of the • Certain merchant banking activities, and subsidiary in any published financial statement. • Certain “insurance company portfolio investment” • The state nonmember bank must comply with the activities. ongoing financial and operational safeguards required by Section 5136A(d) of the Revised Statures of the Conditions Precedent to New Activities: United States, which requires operational safeguards to separate the bank from the risks of the subsidiary. The following guidelines exist relative to a bank holding • The state nonmember bank must comply with the company entering into new activities: amendments to Sections 23A and 23B of the FR Act made applicable by Section 121(b) of the GLBA that require certain ongoing transactional restrictions. • All depository institution subsidiaries of the bank holding company must be “well capitalized” and “well • The state nonmember bank and all of its insured managed.” depository affiliates must have received a CRA rating of not less than a “satisfactory record of meeting • A “satisfactory” or better CRA rating must have been community credit needs” in its most recent CRA received by all of the depository institution examination. subsidiaries at their most recent examination. • The bank holding company must file with the FRB an election to become a financial holding company. Functional Regulation • There is a grandfather provision for certain non- conforming activities of a company that is not now a The GLBA also provides for the functional regulation of bank holding company but then becomes one to securities and insurance activities. This means that similar continue to engage in commercial activities in an activities should be regulated by the same regulator so as to amount not to exceed 15 percent of its consolidated promote regulatory efficiencies and eliminate burden and annual gross revenues, excluding bank subsidiaries. duplication. Accordingly, banking activities are to be The grandfather provision will expire ten years after regulated by bank regulators, securities activities by the date of enactment, unless extended by the FRB for securities regulators and insurance activities by State an additional five years. insurance departments. In order for functional regulation to be effective, certain consultation and information-sharing The FRB is the umbrella supervisor for FHC’s. As such, requirements are also contained in the statute. the FRB assesses the FHC’s overall financial condition and the systems for monitoring risks for the entity as a whole. The BHC Act was amended to restrict the authority of the FRB to require reports, conduct examinations, impose Financial Subsidiaries capital requirements or take any other direct or indirect action with respect to any functionally regulated affiliate of a depository institution. Section 45 was added to the FDI Implementing Section 121 of the GLBA as it pertains to Act, which made these restrictions applicable to the FDIC. state nonmember banks, the FDIC added Subpart E to Part 362 of its regulations. For purposes of Subpart E, a It is still necessary to determine the significance of the “financial subsidiary” is defined as a subsidiary that is activities conducted by the functionally regulated controlled